An Up-and-Coming Company Poised for Dramatic Growth

I was intrigued recently when two of our top analysts independently recommended the same stock at our annual investing conference. I spent the next five days obsessing over every detail I could find about this stock and concluded that it's even better than our analysts thought. Indeed, at the end of this article, I'll show how Zipcar (NAS: ZIP) could hypothetically turn $6,975 into $1 million.

The light went onI'll be the first to admit that I never took Zipcar seriously. Like skinny jeans, I associated it with urban hipsters who used it to symbolize their social progress and, by implication, my social decay.

I was therefore surprised to learn that the executive chairman of Ford (NYS: F) called it "the future of transportation." What I had failed to appreciate was that Zipcar isn't simply another car-rental company like Hertz (NYS: HTZ) or Avis (NAS: CAR) , but that its service may in fact redefine our relationship with the automobile.

For much of the 20th century, owning a car went hand-in-hand with the American dream of owning a home. And like owning a home, an automobile's expenses don't cease with its purchase, as you have to pay for a license, registration, insurance, fuel, maintenance, and taxes. With everything figured in, AAA estimates that the average American spends $9,279 a year on each vehicle he or she owns.

Source: 2010 AAA study, "Your Driving Costs." (Numbers represent an average of small, medium, and large sedans, SUVs, and minivans.)

Given the recent economic troubles, in turn, I was intrigued by Zipcar's claim that its members save $500 a month by not owning a car. Like Berkshire Hathaway's (NYS: BRK.B) NetJets, which provides fractional aircraft ownership, Zipcar gives its members access to a fleet of vehicles dispersed throughout American cities and college campuses. As opposed to incurring the expenses associated with owning an automobile, its members simply pay by the hour or day when they need one. Zipcar then takes care of the rest, including gas and insurance. Under this model, Zipcar members purportedly save $6,000 a year!

Source: 2010 AAA study, "Your Driving Costs," and Zipcar's website.

If there's one thing I've learned ...

Companies that save their customers money tend to make shareholders rich. Two classic examples are Wal-Mart and McDonald's. Although neither company invented a product, per se, both enriched their shareholders by figuring out how to sell products at a discounted price.

Costco (NAS: COST) and Netflix are more recent examples. Indeed, Costco is so dedicated to low prices that it doesn't make a profit at all from the things it sells. Its profit comes entirely from membership fees, much to the consternation of Wall Street. And despite its recent troubles, Netflix gives its members access to millions of movies for less than $10 a month.

Zipcar is catching onSo I wasn't surprised to discover that Zipcar is rapidly growing its membership base.

Its domestic growth strategy takes a page out of Facebook's original playbook, using college campuses to acquaint young drivers with its services and thereby indoctrinate future Zipsters. It then expands into the surrounding metropolitan areas by purchasing conveniently placed parking spaces or entering into agreements with companies like Equity Residential, a nationwide residential real estate trust.

Zipcar's strategy has increased its membership base to 605,000 Zipsters, and it now operates in 15 major metropolitan areas and on 230 college campuses throughout the United States. And lest you think its growth is nearing an end, in the past two quarters alone its membership base grew by an average of 30% year over year.

Source: Zipcar's Q2 quarterly financial results.

What's the hypothetical potential?The magnitude of Zipcar's success ultimately depends on the future size of the car-sharing market both here and abroad, as Zipcar also has a presence in the United Kingdom and Spain. Although the present size of the domestic market appears to be somewhere in the neighborhood of $500 million, Zipcar believes it will grow to around $3 billion. But if it reaches its hypothetical potential, according to my calculations, it could turn $6,975 in 372 Zipcar shares into $1 million.

Here's how. At present, there are 113 million households in the United States and 211 million household vehicles. There are, accordingly, 98 million households with more than one vehicle. If you replace these redundant vehicles with car-sharing memberships and also consider that our population continues to increase, then you wind up with somewhere in the range of 100 million potential new car-sharing members, 50% of which will sign up with Zipcar if it maintains its present market share. After factoring in Zipcar's average quarterly revenue per member and its target net profit margin of 27%, in turn, you end up with earnings per share of $142, and $164 if you include projected earnings from abroad. At a multiple of 16.4, this equates to a share price of $2,690, a vast improvement over its present $18.75. At this price, the 372 Zipcar shares you purchased for $6,975 are now worth $1 million.

Granted, this is an extremely aggressive assumption. For example, the company wouldn't be able to command as aggressive profit margins in lightly populated rural areas where its services wouldn't be convenient. However, as a thought exercise, it does show the massive growth potential for Zipcar if the company can successfully market the cost savings its services represent for consumers.

So what should you do?Whether you should buy Zipcar shares depends on what you're looking for in an investment. If you're looking for income, you're better off with companies such as UPS (NYS: UPS) or CSX (NYS: CSX) , two stable dividend payers with an established presence in the transportation and logistics industry. On the other hand, if you're looking for the one stock that could potentially singlehandedly finance your retirement, then I recommend you look closely at Zipcar.

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At the time this
article was published Fool contributor John Maxfield currently has no financial stake in any of the companies mentioned in this article. The Motley Fool owns shares of Costco, Ford, UPS, Berkshire Hathaway, Wal-Mart, and Zipcar. Motley Fool newsletter services have recommended buying shares of Ford, Netflix, McDonald's, Costco, Zipcar, Berkshire Hathaway, and Wal-Mart, creating a bear put spread position in Netflix, and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.